5 Expert-Recommended Alternative Investments: How They Work and When To Invest
Written by
Martin Dasko
Edited by
Molly Sullivan
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According to an analysis from Security.org, cryptocurrency awareness and ownership rates have risen to record levels. Forty percent of American adults now hold some form of a digital asset, an increase from 30% in 2023. This means that Americans are seeking out alternative investments instead of relying on a savings account or the stock market to grow their funds.
If you want to invest your money, you may have considered alternatives to traditional options to diversify your portfolio. In this article, we’ll explore the idea of alternative investments so that you understand what you’re getting into.
What Are Alternative Investments?
Here’s what the experts had to say about alternative investments.
“Financial assets that don’t fit into the traditional categories, like stocks, bonds or cash, are referred to as alternative investments,” said Steven Kibbel, a CFP® and senior editor at InternationalMoneyTransfer.com. “These consist of art, collectibles, hedge funds, real estate, private equity, commodities (such as gold or oil) and even cryptocurrencies.”
It’s worth pointing out that real estate is often termed an alternative investment, even though, according to data shared by the Pew Research Center, a primary residence accounts for a median of 45% of total net worth for homeowners as of 2021.
Kibbel pointed out that since these assets operate independently of traditional markets, they have lower regulatory requirements and may require more cash. You should keep this in mind as you work on diversifying your portfolio.
How Do Alternative Investments Work?
Kibbel noted that these investments function in different ways. Here’s a break of how alternative investments could lead you to financial returns:
- Real estate can provide you with returns through property value appreciation and rental income if you can find a reliable tenant to cover your expenses.
- Energy resources and precious metals are often used as inflation hedges.
- Venture capital and private equity require you to invest in unproven business ideas with significant growth potential, but they also come with liquidity risks.
- Hedge funds use sophisticated techniques like arbitrage and leverage to aim for disproportionate profits for investors.
- Cryptocurrencies are highly risk-tolerant because of their sharp fluctuations and reliance on blockchain technology.
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What Are the Best Alternative Investments?
These are the best alternative investments worth investing in, according to the experts.
Real Estate
According to Kibbel, real estate, with its potential for inflation protection and consistent income, can be one of the better alternative investments.
Private Equity/Venture Capital
Private equity may yield significant profits if the company invested in goes public or is purchased.
Kibbel elaborated, “If you support the proper startup, venture capital can potentially be very successful, but there’s a significant chance of total loss.”
Commodities
Kibbel noted that during market downturns, commodities, especially gold, continue to be a reliable option for substantial investment returns.
REITs
“If one wants to access the real estate asset class and maintain liquidity, Real Estate Investment Trusts (REITs) may be appropriate,” said Robert R. Johnson, PhD, CFA and professor at Heider College of Business, Creighton University. “REITs can be a great way to add this asset class to investors’ portfolios.
Most REITs are diversified, and you get ownership of many different properties. The returns for REITs can be more stable than the other options since they trade like stocks.
Collectibles
Collectibles such as rare vehicles, wine or artwork may increase in value over time for people with specialized hobbies, but they are illiquid and require much more research to ensure that you know what you’re getting into.
What About Cryptocurrency?
Johnson shared concerns about cryptocurrencies.
“Even labeling them as currencies is misleading, as one of the fundamental characteristics of a good currency is stability of value,” he said.
While cryptocurrency is becoming a more popular alternative investment option, Johnson stressed concerns over how one can’t apply traditional finance tools to arrive at the asset’s intrinsic value. Most experts will agree that allocating funds to cryptocurrency is more speculating than investing.
Johnson added, “Cryptocurrencies don’t produce anything, a fact that Warren Buffett eloquently explained at the Berkshire Hathaway Annual Meeting in May.”
When’s the Right Time To Invest In Alternative Investments?
When does it make sense to invest in an alternative asset?
You Have To Assess Your Personal Situation
“Take into account your time horizon, liquidity requirements and risk tolerance when determining whether alternative investments are a good fit for your portfolio,” Kibbel said. “Compared to stocks or bonds, these investments can be more difficult to sell rapidly and frequently require long-term commitments.”
You have to evaluate your personal situation because you don’t want to invest funds that you’ll need for any upcoming expenses into alternative assets because there are no guarantees that you’ll be able to collect your returns in time. You also don’t want to risk money that you can’t afford to lose so that you don’t put yourself into a compromising situation.
You’re an Experienced Investor
Kibbel shared that alternative investments can be a good fit for you if you’re an experienced investor seeking higher returns or diversification. You should also be at the stage of your investing career where you can accept a higher degree of risk with less regulation. If you’re new to investing, you’ll want to ease your way in instead of jumping into cryptocurrency or collecting art.
When You Don’t Need Liquid Funds for Short-Term Goals
“From a risk standpoint, alternative investments are viewed by many as good diversification vehicles because their returns are often not closely related to the returns from stocks and bonds,” Johnson said. “The biggest problem with alternative investments is that they often aren’t as liquid as traditional investments.”
Before investing in illiquid and risky assets, you should be aware of your financial plan and how quickly you want to access your funds. The biggest issue with most alternative investments, such as private equity and real estate, is that your money could be tied up for an extended period of time before you see any returns.
The experts agreed that you should do extensive research before investing in any alternative asset, especially when dealing with more complicated and speculative options like venture capital or cryptocurrency.
Johnson concluded, “For the vast majority of individual investors, alternative investments are neither necessary or appropriate.”
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